Job creators, or return seekers?

The almost two decades since the Clinton tax increase in 1993 have constituted a mighty experiment in macroeconomics. That period — more than a quarter of the entire postwar era — is divided into two periods of almost one half each, the first being a period following tax increases and the more recent period following two large tax cuts. The empirical evidence shows that the period following the tax increase experienced the largest peacetime expansion in U.S. history and the creation of 23 million jobs. The period following the tax cuts produced the most anemic growth and job creation, even before the Great Recession wiped out employment, growth and wealth across the economy. The positive labor market participation rates in the first period was paralleled by net private investment increases and uptrends on the National Federation of Independent Business' business conference and hiring indicators — all of which were more favorable following the Clinton tax increases.

The results of the mighty experiment have other support from American history. During the years in the past 70 when the top-margin tax rate was at or above the 39.6 percent of the Clinton years, the U.S. experienced annual GDP growth of 3.8 percent, compared with only 2.1 percent a year when the rates were below that level. The two fastest-growing decades in the last 70 years had the highest marginal tax rate, while the two slowest-growing decades had marginal tax rates that were the second and third lowest. This extensive historical experience is also supported by data from the high-income countries of the Organization for Economic Cooperation and Development since 1970, which showed no discernible difference in growth rates between the high- and low-tax rate countries.

This extensive evidence is a powerful rebuttal to the perennial Republic Party prescription for tax cuts as the cure for all ills, regardless of the fiscal condition of the country or position of the theoretical Laffer Curve.

With $2 trillion in cash reserves and another trillion held overseas, U.S. corporations are not in need of more cash to be in position to make investments and hire more workers. Profitability of U.S. nonfinancial corporations is at the highest level since the 1960s. Corporate profits as a percentage of GDP are at the highest level since the 1950s. The percentage of wealth controlled by the most affluent is at levels not seen since 1929. Interest rates are at the lowest level in U.S. history. More money in the hands of these corporations and individuals will do nothing to stimulate domestic investment and job growth. Lower rates on dividends might actually lead companies to distribute reserves that otherwise might be used for internal investment.

Although often referred to as "job creators," the affluent are, in fact, return seekers. Returns might be achieved through creating domestic growth and hiring people, but they can also result from shifting jobs overseas or replacing employees with labor-saving equipment. There is nothing wrong with this. Seeking returns is the heart of capitalism. But it does argue against predicating a national job creation strategy on this basis.

What is missing in the current economic recovery is consumer demand — customers. Employee compensation as a percentage of GDP dropped from 66.3 percent when Ronald Reagan took office to 61.3 percent today. The tax cuts proposed for the affluent would exacerbate the problem, as many experts (the Tax Policy Center, among others) have concluded that the current Republican tax policy would result in either tax increases or cuts to programs that benefit lower- and middle-income citizens and also reduce investment in public goods, all of which have higher marginal utility and returns than amassing even more wealth at the top of the economic pyramid.